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Federal Reserve Bank of Chicago
How Did the 2003 Dividend Tax Cut
Affect Stock Prices?
Gene Amromin, Paul Harrison, and
Steven Sharpe
WP 2006-17
How Did the 2003 Dividend Tax Cut Affect Stock Prices?
Gene Amromin1, Paul Harrison2, Steven Sharpe3
First draft: October 11, 2005
This draft: October 3, 2006
Abstract
We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus
lowered the cost of equity. Using an event-study methodology, we attempt to identify an
aggregate stock market effect by comparing the behavior of U.S. common stock prices to
that of European stocks and real estate investment trusts. We also examine the relative
cross-sectional response of prices on high-dividend versus low-dividend paying stocks.
We do not find any imprint of the dividend tax cut news on the value of the aggregate
U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend
stocks by a few percentage points over the event windows, suggesting that the tax cut did
induce asset reallocation within equity portfolios. Finally, the positive abnormal returns
on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.
1
Federal Reserve Bank of Chicago, gamromin@frbchi.org
Barclays Global Investors, San Francisco, paul.harrison@barclaysglobal.com
3
Federal Reserve Board, ssharpe@frb.gov
* Corresponding author: Steven Sharpe, (202)452-2875, ssharpe@frb.gov
20th and C St., NW, Washington, DC, 20551. .
2
The views expressed are those of the authors and not necessarily those of the Federal
Reserve Board, the Federal Reserve Bank of Chicago, or Barclays Global Investors. We
thank Nellie Liang and John Graham for helpful comments. We are indebted to Nicholas Ryan
for his excellent and extensive research assistance.
1
I.
Introduction
On May 28th of 2003 the President signed into law The Jobs and Growth Tax Relief
Reconciliation Act of 2003 which, among other provisions, reduced the maximum tax
rate on dividends from 38 to 15 percent. A related provision in the bill lowered the top
rate on long-term capital gains from 20 percent to 15 percent, thereby equalizing those
two tax rates for the first time since 1990. The dividend tax cut was perhaps the most
dramatic provision in the bill and was almost certainly the most contentious. Indeed, the
bill passed the Senate on a vote of 51-50, following weeks of wrangling, and up until the
last day it remained unclear whether the bill would contain anything close to the
significant cut in dividend taxes that was ultimately enacted.
During the debate leading up to enactment, proponents ascribed many benefits to
the dividend tax cut. One of the main arguments was that reducing taxes on investment
income would lower the cost of capital to business, stimulating investment and job
creation.1 Lower dividend taxes would also be reflected in higher U.S. corporate equity
prices, which, as a side benefit, would boost spending through the wealth effect.2 For
instance, a Treasury official testified before Congress that, although the Treasury had not
worked up its own estimate, “estimates [by others] of the impact on stock market
valuations range from 5 percent to 15 percent (Fisher (2003)).” By capitalizing the CBO
projection of the annual flow of foregone dividend taxes, Poterba (2004) estimated that
the dividend tax cut could have boosted the value of U.S. equities by roughly 6 percent.
The likely valuation effects remain a relevant concern going forward, when Congress
faces the decision of whether to allow the tax cuts to expire in 2010, as provided for in
current law.
1
Whether and how dividend taxation affects corporate investment decisions remains an area of active
empirical and theoretical debate, usually referred to as the “new” and “traditonal” views on dividend
taxation. Auerbach and Hassett (2002) provide an extensive overview of this important topic, which is
beyond the scope of this paper.
2
The other widely-cited benefit advanced by proponents of the bill was that the reduction in the dividend
tax rate would encourage more companies to pay dividends, facilitating both the redistribution of capital
resources and corporate governance reform. While Chetty and Saez (2005) document a substantial boost to
dividends from the tax cut, Brown, et al. (2004) find that the tax cut had a more muted effect on total
payouts because many firms offset the increase in dividends with less share repurchases.
2
In this paper, we test the hypothesis that the cut in capital taxation boosted U.S.
stock prices.3 We use an event-study methodology focused on time periods with notable
positive news about the potential for passage of a dividend tax cut. We attempt to
identify an aggregate market effect by comparing the behavior of U.S. common stock
prices to the prices of securities that received no direct benefit from the tax cut. Our
primary test involves comparing stock returns in the U.S. to returns on European stock
markets, where U.S. investors – the beneficiaries of the tax law change – hold only a
small fraction of shares outstanding (and presumably do not make up the “marginal
investor”). We also compare the performance of U.S. stocks to the returns of real estate
investment trusts (REITs), which received no benefit from the tax cut as they were
already tax-advantaged.
In addition, we analyze the cross-sectional impact of the dividend tax cut news,
by examining the relative response of stock prices across firms with different dividend
policies. Such analysis allows us to address the tax effect at a disaggregated level and
provides a robustness check on the validity of our event window choices. Given the
uncertainty that always surrounds future tax policy, compounded in this case by sunset
provisions and projections of large budget deficits, investors may well have discounted
more heavily the tax savings on far-future dividends. If so, stocks with high current
dividend yields would have been affected more than “growth” stocks paying little or no
dividends. Finally, to bring some further counter-factual evidence to bear, we examine
the cross-sectional behavior of yields on U.S. corporate bonds and the cross-sectional
behavior of U.K. stock prices during the event windows.
In sum, we fail to find much, if any, imprint of the dividend tax cut news on the
value of the aggregate stock market. U.S. large-cap and small-cap indexes do not
outperform either their European counterparts or REITs over the event windows. Despite
3
In this regard, our paper fits within an extensive literature on capitalization of taxes in asset prices,
reviewed in Auerbach (2002) and Poterba (2002). Empirical verification of tax capitalization has
proceeded across three distinct paths: tests of Brennan’s (1970) after-tax version of the CAPM, studies of
ex-dividend date returns, and analyses linking tax rates and asset valuations. Recent work, such as that by
Graham, Michaely, and Roberts (2003), Chetty, Rosenberg, and Saez (2005), and Sialm (2005a), to name
just a few, has been concentrated in the last two strands.
3
the claims of the tax-cut proponents, this result may not be too surprising. As suggested
above, investors’ might have capitalized only a small part of the future tax benefits, due
to the explicitly temporary nature of the tax break. In addition, given the preponderance
of tax-free investors, and institutional investors that book dividends as ordinary income,
the “marginal investor” might have benefited relatively little from the tax cut.
The absence of a measurable aggregate effect, however, should not necessarily be
taken as evidence of “tax irrelevance.” In fact, our cross-sectional analysis indicates that
high-dividend yield stocks did experience positive abnormal returns over the event
windows, while low-dividend stocks moved in the opposite direction. These
countervailing stock movements are consistent with the possibility of portfolio
rebalancing by alert taxable investors and would attenuate the aggregate effect of the tax
cut. Our interpretation of the positive abnormal returns on high-dividend stocks (in
concert with no aggregate effect) is further bolstered by the lack of a similar pattern of
abnormal returns within the cross-section of U.K. equities, which did not benefit from the
tax law change.
On the other hand, we find that non-dividend paying stocks, in contrast to lowdividend yield stocks, outperformed the market (but not high-dividend yield stocks) on a
risk-adjusted basis during the event periods. At first glance, this finding is surprising
because the tax gains on these shares accrue in the more distant future. However, further
careful inspection suggests that the timing of their abnormal returns is not tied to the
event window. Moreover, our analysis of these firms’ stock buybacks, on the one hand,
and the returns on non-dividend-paying foreign stocks, on the other, both suggest that the
zero-dividend stocks’ performance was unrelated to tax cut news.
On a purely statistical level, our cross-sectional findings are consistent with the
empirical results in Brown, Liang, and Weisbenner (2004) and Auerbach and Hassett
(2005, 2006) who also conduct event studies around the dividend tax. Those studies use
the cross-sectional variation in stock returns to test their hypotheses. Brown, Liang, and
Weisbenner (2004) test for the role of executive share ownership on the level and
4
composition of total payouts, while Auerbach and Hassett use the stock market response
to the tax cut to evaluate the “new” versus the “traditional” view of dividend taxation.
Neither analysis addresses the overall effect of the dividend tax cut on the U.S. stock
market. Indeed, some of their inferences seem to require the assumption of a positive
aggregate effect. Our results do undermine the Auerbach and Hassett (2005, 2006)
interpretation of positive excess returns on zero-dividend stocks as a consequence of the
dividend tax cut.
Dhaliwal, Krull and Li (2005) estimate the aggregate valuation effect induced by
the tax act. They back out two ex ante estimates of the required return on equity using
the level of stock prices and analysts earnings forecasts at two different dates. In
principle, this approach controls for news about future cash flows, but it requires strong
modeling choices and heroic assumptions about stability of the risk premium. Thus, their
finding that the aggregate cost of capital declined seems largely attributable to their
choice of event window – March 31st to June 30th. That window begins in the wake of an
apparent peak in the market risk premium induced by uncertainty and anxiety regarding
the probable invasion of Iraq. To the extent that changes in equity risk premiums are
global, this highlights the benefit of using European stocks (and REIT shares) as controls.
II.
Event Windows
News that a substantial dividend tax cut was being considered by the
Administration as part of a major 2003 tax package first appeared in December of 2002,
beginning with a piece in the December 4th Wall Street Journal (McKinnon, 2002). The
press reports in December contained few details and largely couched the issue as a
subject of debate within the administration. The administration’s intention to propose a
dividend tax cut only became clear in a January 3rd Washington Post article (Allen and
Milbank (2003)), which also laid out some of the elements of the tax package in advance
of the President’s January 7th speech to the Economics Club of Chicago.
5
The vertical bars in Figure 1 plot the daily number of news stories in the 15
largest U.S. newspapers that discussed both “dividends” and “taxes”. As shown,
newspaper coverage on this issue skyrocketed in the first week of January, peaking on
January 8th, the day after the speech. The number of such stories quickly subsided
during February through April as legislation made scant progress and the public focused
on the prospect of war in Iraq. We therefore assume that the first major event window
occurs between January 3-9 (shaded in figure 1), the period over which newspaper
coverage initially spiked.4
The dividend tax cut became a prime news story again in early May, following
reports that House Republican leaders had finally agreed on a specific tax package
containing a provision to lower the top tax rate on corporate dividends to 15 percent.
Still, prior to mid-May it remained unclear whether any substantial cut in dividend taxes
could pass the Senate. For instance, a May 5th Wall Street Journal article (Murray and
McKinnon (2003)) led off with: “The Senate Finance Committee’s tax package probably
won’t include any of the dividend-tax relief that President Bush wants, although it will
leave room for a smaller version of the benefit if Republicans can muster support for it.”
On May 9th, it was reported that the Senate Finance Committee had agreed to include as
part of the Senate tax package a much scaled-back benefit. That tax package – which
included only miniscule dividend tax relief compared to the original proposal – was
expected to see “rougher waters” on the Senate floor (Murray (2003)).
However, a breakthrough was reported on May 15th (Firestone (2003)),
specifically that the previous day “a bipartisan group of senators reached agreement with
Republican leaders… adding a crucial Democratic vote to President Bush’s plan for
eliminating taxes on dividends.” Indeed, on May 15th, three Democrats joined 48
Republicans to pass a package under which investors could exclude 50 percent of
4
This window coincides with the second of eight event windows assumed by Auerbach and Hassett (2005).
It seems to us more plausible that there was too little meaningful information made available during their
first, December 23-30, window. Moreover, one could argue that, prior to the period surrounding the
January 7 speech, the small boost to the probability of a dividend tax cut eventually occurring was just as
likely to have occurred in the first couple weeks of December as in the last. In any case, our analysis will
provide some sense of the robustness of the conclusions to ruling out a December window.
6
dividend income from taxes this year and 100 percent of such income in 2004-2006, after
which point the tax would be reinstated in full.
Consequently, our second event period begins with May 14th, the day of the first
major breakthrough in Senate negotiations. The last obstacle was breached with Senate
passage of the compromise legislation early in the morning on May 23rd, but we let the
formal event window run through May 28th, two business days later, when the President
signed the bill.5
As shown in the chart, stock market gains during the two tax-cut event windows
are relatively modest. Over the January 3-9 window, the S&P 500 and the Russell 2000
small-cap index rose about 2 percent and 1 percent, respectively. Over the May 14-28
window, the S&P 500 rose 1.2 percent, while the small-cap index rose 2.7 percent.
(Including May 6-13 would boost the second-window returns to 2.9 and 5 percent,
respectively.) These moves appear to be swamped by the slump and rebound of share
prices around the threat and then realization of war in Iraq. In particular, on March 17th,
news that the U.S, Britain and Spain announced an end to their efforts to win UN support
for a war, and of an impending televised address by Bush, sent the S&P 500 soaring 3-½
percent that day alone (McKay (2003)). Investors were apparently relieved by the
resolution of the uncertainty about if and when the war would commence.
III.
Aggregate Market Evidence
Although our empirical analysis of the effects of the 2003 dividend tax cut on the
stock market takes on several guises, the methodology is similar in all cases. In this
section, we present three tests contrasting the change in value of a portfolio of U.S.
common stocks that currently (or prospectively) generate taxable dividend streams with
the change in value of a benchmark portfolio of securities during the two event windows.
5
This window roughly coincides with windows 7 + 8 from Auerbach and Hassett (2005). One could
reasonably justify a different starting point for our second event period. In particular, one could argue for
May 6, the day the House Ways and Means Committee approved a $550 billion tax package including a
substantial cut in dividend tax rates. On the other hand, we could have chosen May 23 as the starting point,
following Brown, et al. (2005). In either case our qualitative results would stand; however, using the
longer period reduces the power of our tests by widening the confidence bands.
7
In each case, the tax cut legislation under consideration can be reasonably presumed to
have little or no direct effect on the valuation of the benchmark portfolio. Thus, by
examining the relative returns on U.S. common stocks, we can in principle control for the
effects of general economic news and investor sentiment.
Our first two tests compare U.S. stock market returns with returns on foreign
equities. The benefits of the dividend tax cut would accrue only to investors subject to
the U.S. tax law, and U.S. investors hold a relatively small fraction of foreign equities –
between 10 and 15 percent of most European markets (Department of the Treasury and
Federal Reserve Bank of New York (2005)). In addition, the benefit of the tax cut to a
U.S. owner of foreign stocks is typically less than the benefit they would receive on U.S.
company dividends because the U.S. taxpayer’s total tax liability on a foreign stock
equals the maximum of the U.S. and foreign country dividend tax rates (Rousslang
(1999)).
Figures 2 and 3 present our tests for excess positive returns on the U.S. stock
market relative to foreign counterparts. The top panels of Figure 2 show the levels of two
broad large-cap stock market indexes – the S&P 500 and S&P Euro 350 (IShares) –
surrounding the key time periods. The latter index tracks large firms domiciled in
continental Europe, covering about 70 percent of the region’s market capitalization and
spanning 17 exchanges.6 Over both event windows, shown by the two shaded areas, the
performance of European stocks appears similar to or better than that of U.S. stocks.
Although the visual evidence in the top panel is suggestive, this comparison does
not control for the “normal” relationship between U.S. and foreign equities. To do so, we
assume that the U.S. and foreign stock indexes are influenced by a common (global)
market factor, but with different loadings, or sensitivities. We then regress daily S&P
500 returns on daily S&P Euro 350 returns in the six months before and after the event
6
An important characteristic of the S&P 350 Euro index is that it is available to the U.S. investors in the
form of an exchange-traded fund, which eliminates non-synchronicity problems associated with foreign
securities traded abroad. Since the value of the exchange-traded fund is held close to the Index by
arbitrage, it does not matter that the exchange-traded fund is largely owned by US investors.
8
period (July-Dec. 2002 and July-Dec. 2003) to obtain an estimate of the relative beta for
the S&P 500 during normal times.7
We find a strong positive link between returns in the two markets (β = 0.66), with
fluctuations in foreign equity returns accounting for nearly two-thirds of variation in the
S&P 500 returns. Abnormal returns are calculated as the difference between actual and
model-predicted S&P 500 returns. These abnormal returns are then cumulated over the
relevant time horizon and plotted in the lower panel of Figure 2, normalized to 100 at the
beginning of each event window (January 2 and May 13, 2003).
If the U.S. stock market responded to the possibility of a dividend tax cut, then its
cumulative abnormal returns (CAR) would be positive during the event periods. As
shown by the thick black line in the lower left hand panel, the cumulative abnormal
return from January 3-9 is estimated to be positive but small, about 2 percent. On the
other hand, abnormal S&P 500 returns over the May event window are negative, on net.
Thus, during the key periods where the actual form of the tax cut took shape and was
adopted, the S&P 500 did not outperform a comparably broad index of European
equities. The picture also indicates that including December in the event window would
not help boost the estimated effect.
At the same time, it is important to note that our test has fairly low statistical
power. Daily index returns were quite volatile in 2002 and 2003, with a standard
deviation of 1.5 percentage points over our estimation period. Even though much of this
variance is explained by movements in the S&P Euro 350 index, the remaining variation
is large enough to generate wide standard error bounds, which increase as the event
horizon lengthens.8 The error bounds, shown by the dotted lines, serve as an illustration
of the magnitude of the stock market response necessary to overcome statistical doubts
about the tax effect, a task that this exercise clearly fails.
7
We exclude January-June 2003, the period over which the proposal is announced and debated, because the
correlation between returns the two markets’ returns was presumably distorted by events. Estimated
abnormal returns are similar when model estimation period is 2002, but error bands are somewhat wider.
8
See Campbell, Lo, and MacKinlay, 1997, chapter 4.
9
As a robustness check, we re-estimate our results using weekly returns data,
which smoothes out some day-to-day fluctuations in the market. Although the variance
of excess weekly returns is lower, their cumulative level (the thin solid line in the bottom
panels) is about the same and still below zero over the May period, again indicating no
measurable positive effect of the tax cut.9
Small-capitalization stocks, as reflected by the Russell 2000 index, outperformed
large-cap stocks over 2003, particularly around May. This observation seemed to
contradict to the common wisdom that large-cap stocks, particularly companies paying
high dividends now, stood the most to gain. That view is consistent with a fairly simple
valuation framework where future tax policy is uncertain, and thus the tax-liability
benefit on distant-future dividends is heavily discounted.10
If small-cap U.S. stocks were positively affected by the tax cut, then one would
expect small-cap stocks in the U.S. to have performed unusually well in comparison to
foreign small-cap stocks. We examine this hypothesis in Figure 3, where the FTSE Small
Cap index is used as a foreign-market counterpart to the Russell 2000.11 The comovement exhibited in the top panels suggests that the surge in small-cap stocks was a
global phenomenon. This is confirmed by the abnormal returns plotted in the lower
panels of the exhibit at the daily (thick solid line) frequency. The abnormal returns are
zero over the January event window, and are even marginally negative over the May
window, again contradicting the hypothesis that the tax cut was behind the strong market
performance of small-cap U.S. stocks.
As an alternative to using foreign markets as a control, we also consider a class of
U.S. assets whose dividends were specifically excluded from the 2003 tax cut. Real
9
We estimate the other excess returns models with the weekly data as well. As the results remain
qualitatively similar, we do not show the weekly excess returns separately.
10
If there is uncertainty about the permanence of the dividend tax cut, stocks with lower dividend yields
should experience a smaller price response (see Auerbach, 2002). The dividend yield of the Russell 2000 is
substantially lower than that of the S&P 500 firms.
11
The FTSE Small Cap index tracks stocks trading on the London stock exchange, which creates a nonsynchronicity problem. To address this issue, in estimating a model for abnormal returns, we regress
Russell 2000 returns for calendar day t on FTSE Small Cap returns for calendar days t and t+1; we also
estimate a weekly version (not shown for brevity).
10
estate investment trusts (REITs) do not pay taxes on their profits at the corporate level if
they distribute at least 90% of taxable profits to their investors. Although such
distributions are commonly referred to as “dividends,” their tax-free pass-through to
investors made them ineligible for the lower dividend tax rate. Consequently, if the
dividend tax cut boosted the valuation of (eligible) common stocks, one would expect
REIT returns to have underperformed relative to the broad market over the event
windows; that is, abnormal REIT returns should have been negative.
As shown in the top panels of Figure 4, REIT share prices generally tracked the
overall market for most of the event windows, even after the reconciled version of the tax
legislation passed the Senate-House conference and the tax treatment of REIT
distributions was made clear. Only on the day before the bill was signed into law did
REIT shares decline sharply, and then only temporarily. The lower panels of Figure 4
examine the cumulative abnormal REIT returns, estimated relative to S&P 500 returns.
Abnormal returns are near zero during the event windows and well within the estimated
error bounds and are modestly positive by the end of July. Having found no effect of the
dividend tax cut on aggregate U.S. stock valuations, in the next section we attempt to
determine whether the legislation had any significant cross-sectional effects on U.S. stock
valuations.
IV.
Cross-sectional Evidence
A. Abnormal returns by current dividend yield portfolio
In a world without uncertainty where all corporate net income is eventually paid
out as dividends, a once-and-for-all cut in the dividend tax rate would have a similar
positive valuation effect on all common stocks, regardless of their current dividend yield.
Perhaps the most obvious complication is the uncertainty regarding future tax policy in
light of the frequency of such changes over the century (see, for example, figures 3 and 4
in Sialm (2005b)). Indeed, the 2003 law and its early incarnations explicitly embedded
sunset provisions – the reduced dividend tax rate was set to expire in 2008, absent
11
additional legislative action.12 Together with growing budget deficits, the sunset
provision undoubtedly added to the usual degree of uncertainty about the duration of the
benefit.
The uncertain permanence of a dividend tax cut should dampen the positive
valuation effect on all stocks, but more so for stocks on which the lion’s share of
dividends may not be paid until far into the future, i.e. stocks that currently pay little or
no dividend. 13 Accordingly, we look for cross-sectional effects of the proposed dividend
tax cut by splitting our sample of roughly 2800 firms into four portfolios based on their
dividend yield in 2002. As shown in Table 1, just over half of the firms paid no
dividends in 2002. We split the dividend-paying firms into three portfolios, high-,
medium-, and low-dividend firms. We define high-dividend firms as those for which the
ratio of 2002 dividends to end-of-year price (“dividend yield”) is greater than 3 percent,
about a fifth of the dividend-payers. Medium-dividend firms have a dividend yield
between 1 and 3 percent, while low-dividend firms are those with a dividend yield of less
than 1 percent. Summary statistics for each group are presented in Table 1. The zerodividend firms are notably smaller, more investment intensive, and less debt reliant than
the other groups.
The top panels of Figure 5 show the cumulative realized returns for each group
(equal-weighted) over the two event periods. The cumulative returns ranged between 1
and 2 percent during the January 2003 event window for each group. During the May
event period, the high-dividend and zero-dividend portfolios logged gains of
approximately five percent, noticeably more than the other portfolios.14 Because risk
characteristics almost surely vary systematically across these groups, we test for
differential performance by computing abnormal returns using the Fama-French three12
On May 11, 2006, the Congress voted to extend the tax cut for two more years, to 2010.
13
Low-dividend firms tend to be concentrated in growth industries, where firm survival and thus eventual
payment of dividends is more uncertain. Consequently, low-payout firms may be construed to have riskier
dividend streams inducing risk-averse investors to discount some of the tax benefit and generating a
second-order effect on the relationship between payout rates and response to a tax cut.
14
Results are qualitatively similar for value weighting.
12
factor model estimated over a twelve-month period that straddles the event period (JulyDec, 2002 and July-Dec. 2003). Conclusions are insensitive to choice of the estimation
period.
As seen in the bottom panels of Figure 5, the high-dividend portfolio generated
abnormal returns of around 1 percent in the January window and nearly 3 percent in the
May window. Interestingly, in the latter period, it appears that high-dividend stocks
began to diverge from low- and medium-dividend stocks on May 14th, a pattern that
persisted until the day before the legislation was signed. This supports our presumption
that the May 14-28 period was an appropriate choice for the event window. As shown
formally in Table 2 (columns 3 and 4 of panels A and B), over each event window, the
abnormal returns of the high-dividend firms are statistically different from zero and from
the abnormal returns of low-dividend firms.
To verify whether the positive CAR for high-dividend stocks over the event
windows can be ascribed to the dividend tax cut, we carry out several robustness checks.
First, we estimate abnormal bond returns for those high- and low-dividend firms that
have bonds outstanding. If the performance differential between high- and low-dividend
stocks is related to systematic differences in economic news, rather than the tax cut, then
we would also expect to see some differential in the bond returns for the two groups of
firms. As reported in Table 2 (panel C), we find no evidence of abnormal bond returns
for either the high- or low-dividend group, consistent with the presumption that the gap in
equity performance is driven by the tax event.
In addition, we test for differences in abnormal returns across dividend-yield
based portfolios in a cross- section of UK stocks using a simple market model. The
results shown in Figure 7 are in stark contrast to those for the U.S. stocks. In particular,
we find that abnormal returns for both high- and low-dividend UK stocks were
essentially zero over event windows defined on the basis for the change in U.S. tax law.
Importantly, this result also corroborates our earlier identifying assumption that the
13
dividend tax cut did not have any substantial implications for the valuation of European
stocks.
One way to reconcile the apparent tax responsiveness in the cross-section of stock
returns with the absence of an aggregate tax effect is through the possibility of portfolio
rebalancing by taxable investors. Such investors could choose to rebalance their stock
portfolios toward high-dividend stocks, while not changing their overall allocation
between stocks and bonds. Indeed, positive abnormal returns of a high-dividend stock
portfolio in Figure 5 are counterbalanced by the low-dividend portfolio’s losses. In fact,
the stocks in our high-dividend-yield portfolio represented less than 15 percent of the
total market value of the all stocks in the sample. Thus, this subset of stocks could have
been boosted at the expense of other, lower-dividend-paying stocks.
The results also suggest that the performance differential was not persistent,
having dissipated by July. Though we cannot draw any statistically meaningful
conclusions, a temporary response and reversal could be the result of temporary
illiquidity: that is, the cross-sectional valuation effects of a quick response by alert taxsensitive investors might have been eventually arbitraged away by non-taxable investors
making offsetting portfolio changes.
B. Interpretation of abnormal returns on zero-dividend stocks
Another notable feature of Figure 5 is the positive (1-1/2 percent) abnormal
returns logged by zero-dividend firms in the May window, which are marginally
statistically significant. As mentioned earlier, this result seems to present a puzzle. The
positive CARs on stocks with a high current dividend yield are consistent with theoretical
predictions of the effect of a temporary tax cut for dividend-paying firms. Yet, the outperformance of zero-dividend stocks relative to the overall market (and low-dividend
stocks) casts some doubt on that interpretation.
Auerbach and Hassett (2005) argue that such positive abnormal returns on zerodividend stocks constitute evidence that the tax cut lowered the cost of capital for an
important set of firms. In particular, they hypothesize a world in which share prices of
14
zero-dividend firms should be those most sensitive to the proposed tax cut. Their main
assumption is that zero-dividend firms tend to be immature firms that are more likely
than others to issue a substantial amount of new shares in the future, due to their inability
to satisfy large investment needs with internally-generated funds or by issuing interestbearing debt. Current shareholders of such firms would reap the windfall on dividends to
be paid on current shares as well as shares yet to be issued. This would inflate the
response of those firms current market value to a cut in dividend taxes.15
One way to test this explanation would be to identify those zero-dividend firms
that are most likely to be truly equity-issuance dependent and then compare their
abnormal returns to other zero-dividend firms for which this story is less plausible. We
consider one such experiment in Table 3 and Figure 6. Here, the portfolio of zero
dividend firms is split into three subgroups: firms that did not repurchase shares in the
few years prior to 2003, firms that repurchased on average fewer than 2 percent of shares
per annum, and firms that repurchased at least 2 percent of shares per annum. Arguably,
firms with large repurchases are not likely to be cash-flow constrained “immature” firms
that expect to issue a lot of new shares in the near future. Indeed, in the second row of
table 3, we show the percent of firms in each group that subsequently issued a substantial
amount (2 percent) of new shares between June 2003 and August 2005. The zerodividend firms with large repurchases were notably less likely to subsequently issue new
shares, even compared to firms that paid dividends.
In any case, as can be seen in Figure 6, both inside and outside the event
windows, we find virtually no difference between the abnormal returns of zero-dividend
firms with large repurchases and those with zero repurchases. These results would seem
to cast doubt on the equity-dependence rationale for the positive abnormal event-window
returns by zero-dividend firms.16
15
Of course, the benefits of a temporary tax cut are still smaller than from a permanent cut since the tax
break may expire before a firm decides to pay dividends.
16
This discrete breakdown of zero-dividend firms is admittedly simple; however, the binary measure is
transparent and allows for a simple statistical test of the difference in abnormal returns within the sample of
zero-dividend firms.
15
Another possibility is that the abnormal returns on zero-dividend stocks are
unrelated to the event. In particular, Figure 6 shows that, unlike high-dividend firms, the
abnormal performance of zero-dividend firms is not tied specifically to the event period,
but rather runs almost continuously from mid-April through July. This suggests that
something else may be driving this result; for instance, the risk-factor model used to
estimate normal returns for these firms could be substantially mis-specified.17
We find additional corroboration for this explanation in the performance of the
U.K. stock market. Recall that abnormal returns for all dividend-paying U.K. stocks
were essentially zero over the event windows, in line with our assumption of the tax cut
neutrality outside the U.S. However, as also shown in Figure 7, zero-dividend (and
mostly small-cap) U.K. stocks logged positive abnormal returns throughout the entire
April-June period, similar to what we observed regarding such stocks in the U.S. This is
consistent with the hypothesis that the behavior of zero-dividend-paying shares in the U.S
was the result of a broad (even global) shift in risk tolerances or other fundamentals and
not of the tax cut per se.
V.
Further considerations
In any event study focused on an act of Congress, there will always be some
uncertainty about the appropriate choice of event window due to the incremental nature
of informational events. In the case of the dividend tax cut, while the initial policy
announcement was a discrete event, some information appeared to leak in December
hinting toward the new policy proposal. In addition, our determination of when the
Congressional debate tilted in favor of a substantive dividend tax cut is somewhat
subjective, even if quite plausible.18 One way to provide some evidence on the efficacy
17
We tried testing whether the zero-dividend group also experienced excess bond returns, but only a small
and non-representative fraction of those firms have bonds outstanding.
18
We do not put much stock in the more extreme view that the market response dates back to the promise
of a dividend tax cut during the 2000 election campaign. In such case, tax cut expectations would have
seeped into stock prices over the intervening two-and-a-half years making the effect undetectable by any
event study. First, there is cross-sectional evidence of the positive tax cut effect for certain classes of
stocks. Second, candidate Bush made a number of promises on the campaign trail that did not pan out, and
it is unclear why the dividend tax cut would have been particularly credible. Finally, the closeness of the
16
of our event-window choice used in the aggregate analysis is to use the timing of the
cross-sectional effects as evidence on the reasonableness of the window.
The first pair of columns in Table 4 shows a ranking of the weekly values for
abnormal returns on the high-dividend portfolios in the 52 weeks surrounding the tax
event, starting in November 2002. Each of the three weeks in our two event windows
show up among the top five weeks for abnormal returns on the high-dividend portfolio
(shaded in the table). Indeed, the top week ends on May 28, which covers the days when
the bill was passed and signed by the President. This is the only week in which the
abnormal return on the high-dividend portfolio (1.58 percent) is significantly different
from the mean at the five percent level.
On the other hand, this data also appears to provide evidence of a possible market
response prior to the leaks in December. The second highest week (and the only other
significant observation) is that ending December 11 – the week following the previouslynoted Wall Street Journal article, which revealed administration discussions of a possible
dividend tax cut. The third-highest week is also in December. Nonetheless, even if we
were to change our test of the aggregate market response to focus on early- or midDecember, our conclusions regarding the lack of an aggregate effect would not change.
As was shown in Figure 2, the cumulative abnormal returns on the S&P 500 (relative to
the Euro 350) over that period were close to zero or even negative.
An additional pair of interesting observations from this table comes from the
columns listing abnormal returns on low-dividend and zero-dividend stocks. The
abnormal returns on low-dividend stocks during the event weeks (shaded) are near the
bottom end of the table, consistent with the idea of some portfolio reallocation away from
low-dividend stocks. In contrast, zero-dividend stocks recorded high positive CARs (at
least one standard deviation above sample mean) in ten weeks throughout this period, and
all but one week has no apparent connection to news about the tax cut. Even in that week
(May 28), the return is well below the abnormal return in the highest week (November
eventual vote and the last minute clarification of legislative details indicate that betting on the dividend tax
cut far in advance would have been a rather brave proposition.
17
27) and not much different from returns in several other weeks. This finding is consistent
with our argument that the tax-event-window abnormal returns on zero-dividend stocks
were probably unrelated to the event itself.
VI.
Conclusions
In summary, we find little if any imprint of the dividend tax cut news on the value
of the aggregate stock market. U.S. large-cap and small cap indexes did not outperform
either their European counterparts or REIT stocks during the event windows, regardless
of how broadly those windows are defined. The tax cut did appear to have statistically
significant, cross-sectional effects on stock valuations, with high-dividend firms
receiving a boost at the expense of low-dividend firms, although this effect seems to have
been short-lived. We also find evidence of positive excess returns on zero-dividend
stocks. However, further scrutiny of the time-series and cross-sectional pattern of these
excess returns suggests that they were probably unrelated to the dividend tax cut. This
interpretation is supported by our finding that zero-dividend stocks outside the U.S.
exhibited similarly positive abnormal returns during the tax event windows while foreign
dividend-paying stocks showed no measurable response.
Of course, as with any event study, ours is subject to the usual caveats, the most
significant being our inability to perfectly control for the myriad other factors that may
have influenced U.S. stock valuations during or around the event windows. Regarding
our aggregate results, there is also the problem of fairly wide confidence intervals that
comes from having a somewhat diffuse event. Although we cannot statistically rule out
the existence of a small valuation effect, we can be reasonably certain that the market was
not boosted by more than four or five percent. Moreover, the cross-sectional results
suggest that portfolio rebalancing from low- to high-dividend stocks may be behind the
absence of a sizable aggregate response.
However, we did not attempt to determine why the tax cut might have had little
impact. As suggested earlier, one possibility is that investors discounted the effect on
18
future dividends owing to the built-in sunset provisions, not to mention the uncertainty
regarding the permanence of any tax regime. Another mitigating factor is that a
substantial proportion of U.S. stocks is held in accounts or by entities for which the lower
dividend tax rate does not apply.
19
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Auerbach, Alan J. and Kevin A. Hassett, 2002, On the marginal source of investments
funds, Journal of Public Economics 87, 205-232.
Auerbach, Alan J. and Kevin A. Hassett, 2005, The 2003 dividend tax cuts and the value
of the firm: An event study, NBER Working Paper No. 11449.
Auerbach, Alan J. and Kevin A. Hassett, 2006, Dividend taxes and firm valuation: new
evidence, American Economic Review 96.
Allen, Mike and Dana Milbank, “President to Seek Dividend Tax Cut,” Washington Post,
January 3, 2003.
Brown, Jeffrey R., Liang, Nellie, and Scott Weisbenner, 2004, Executive financial
incentives and payout policy: firm responses to the 2003 dividend tax cut, NBER
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Campbell, John Y., Lo, Andrew W., and A. Craig MacKinlay, 1997, The Econometrics
of Financial Markets (Princeton University Press: Princeton, NJ).
Chetty, Raj and Emmanuel Saez, 2005, Dividend taxes and corporate Behavior: Evidence
from the 2003 dividend tax cut, The Quarterly Journal of Economics 120, 791-833.
Chetty, Raj, Emmanuel Saez, and Joseph Rosenberg, 2005, The effects of taxes on
market responses to dividend announcements and payments: What can we learn from
the 2003 tax cut? NBER Working Paper 11452.
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U.S. Portfolio Holdings of Foreign Securities as of December 31, 2003”
Dhaliwal, Dan, Linda Krull, and Oliver Zhen Li, 2005, Did the 2003 Tax Act reduce the
cost of equity capital?, Working paper, University of Arizona.
Firestone, David, “With Plan for State Aid, Senate Republicans Gain Crucial Democratic
Vote on Tax Cut,” New York Times, May 15, 2003
20
Fisher, Peter R., 2003, “Paying Dividends: How the President’s Tax Plan will Benefit
Individual Investors and Strengthen Capital Markets,” in Hearing before
Subcommittee on Oversight and Investigations of Committee on Financial Services,
U.S. House of Representatives, 108 Cong. 1st Session. (Government Printing Office,
2003), pp. 4-17.
Graham, John, Roni Michaely, and Michael Roberts, 2003, Do price discreteness and
transactions costs affect stock returns? Comparing ex-dividend pricing before and
after decimalization, Journal of Finance 58, 2611-36.
McKay, Peter A., “Stocks Surge on Clarity Over War with Iraq,” Wall Street Journal,
March 18, 2003.
Murray, Shailagh, “Senate Approves Tax Package: Dividend Repeal Survives in ScaledBack Version,” Wall Street Journal, May 9, 2003.
Murray, Shailagh, and John D. McKinnon, “Senate Panel Unlikely to Include DividendTax Relief in it Plan,” Wall Street Journal, May 5, 2003.
Poterba, James, 2004, Taxation and corporate payout policy, American Economic Review
94, 171-75.
Poterba, James, 2002, Taxation, risk-taking, and household portfolio behavior, in Alan
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Rousslang, Donald J., 1999, Foreign tax credit, in J. Cordes, R. Ebel, and J. Gravelle, eds.
The Encyclopedia of Taxation and Tax Policy (Urban Institute Press).
Sialm, Clemens, 2005a, Tax changes and asset pricing: Cross-sectional evidence”,
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Working Paper 11756.
Tax Reform Panel, 2005, The final report of the President's Advisory Panel on Federal
Tax Reform, www.taxreformpanel.gov/final-report.
21
Figure 1
Stock Prices and News on Dividend Tax Cut
25
Number
Index Value (Dec. 31, 2002 = 100)
Mar. 17
Bush Iraq
Ultimatum**
Jan. 3 Jan. 9
May 14 May 28
150
140
20
130
15
120
110
10
Number of Articles*
100
Russell 2000
5
0
S&P 500
90
80
Nov.
Dec.
2002
Jan.
Feb.
Mar.
Apr.
May
June
July
2003
Aug.
Sept.
*Articles concerning dividend tax cut in 15 largest US newspapers.
**President Bush warns Saddam Hussein of 48-hour deadline for invasion.
Key Event Dates for Dividend Tax Cut
Date
Description
1/3/2003
Washington Post article
1/7/2003
Bush announces proposal
5/6/2003
Ways and Means passes version
5/9/2003
House passes version
5/15/2003
Senate passes version
5/23/2003
Reconciled version passes conference
5/28/2003
President signs
22
Oct.
Nov.
Dec.
Figure 2
S&P 500 versus S&P Euro 350
The top panel depicts cumulative realized returns for the S&P 500 index and the S&P Euro 350 index in select months
surrounding the 2003 dividend tax cut. The two event windows are represented by shaded areas. The returns are
normalized to 100 at the start of each window. Cumulative abnormal returns, depicted in the bottom panel, are based
on the contemporaneous regression: S&P 500 returns = a + b (Euro 350 returns), estimated over the second halves
of 2002 and 2003.
Cumulative Realized Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
115
115
Daily
Daily
110
110
105
105
100
100
S&P 500
S&P Euro 350
95
95
90
90
85
85
Dec.
2002
Jan.
2003
Apr.
May
June
July
2003
Cumulative Abnormal S&P 500 Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
104
104
Daily
Daily
102
102
100
100
98
98
Abnormal Daily Returns
2 standard-deviations
Abnormal Weekly Returns
96
94
96
94
Dec.
2002
Jan.
2003
Apr.
May
June
2003
23
July
Figure 3
Russell 2000 versus FTSE Small Cap
The top panel depicts cumulative realized returns for the Russell 2000 index and the FTSE Small Cap index in select
months surrounding the 2003 dividend tax cut. The two event windows are represented by shaded areas. The returns
are normalized to 100 at the start of each window. Cumulative abnormal returns, depicted in the bottom panel, are
based on the contemporaneous regression: Russell 2000 returns = a + b (FTSE Small Cap returns) estimated over the
second halves of 2002 and 2003
Cumulative Realized Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
120
120
Daily
Daily
115
115
110
110
105
105
100
100
Russell 2000
FTSE Small Cap
95
95
90
90
85
85
Dec.
2002
Jan.
2003
Apr.
May
June
July
2003
Cumulative Abnormal Russell 2000 Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
106
Daily
Abnormal Returns
2 standard-deviations
Daily
106
104
104
102
102
100
100
98
98
96
96
94
94
92
92
90
90
Dec.
2002
Jan.
2003
Apr.
May
June
2003
24
July
Figure 4
S&P 500 versus Bloomberg REIT Total Return Index
The top panel depicts cumulative realized returns for the S&P 500 index and the Bloomberg REIT Total Return index
in select months surrounding the 2003 dividend tax cut. The two event windows are represented by shaded areas.
The returns are normalized to 100 at the start of each window. Cumulative abnormal returns, depicted in the bottom
panel, are based on the contemporaneous regression: REIT returns = a + b (S&P 500 returns), estimated over the
second halves of 2002 and 2003.
Cumulative Realized Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
110
110
Daily
Daily
105
105
100
100
S&P 500
REIT Index
95
95
90
90
85
85
Dec.
2002
Jan.
2003
Apr.
May
June
July
2003
Cumulative Abnormal REIT Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
106
106
Daily
Daily
104
104
102
102
100
100
98
98
Abnormal Returns
2 standard-deviations
96
96
94
94
Dec.
2002
Jan.
2003
Apr.
May
June
2003
25
July
Figure 5
Stock Returns by Dividend Intensity
The top panel depicts cumulative realized returns for a sample of 2,842 U.S. stocks in select months during 2002
and 2003. The returns are normalized to 100 at the start of each event window. High-dividend firms are those with
2002 dividends to end-of-year price ratio ("dividend yield") greater than 3 percent, medium-dividend firms have
dividend yields between 1 and 3 percent, and low-dividend firms have dividend yields of less than 1 percent.
Cumulative abnormal returns, depicted in the bottom panel, are based on the contemporaneous regression of
portfolio returns on the three Fama-French factors, estimated over the second halves of 2002 and 2003.
Cumulative Realized Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
121
118
121
Daily
Daily
118
115
115
112
112
109
109
106
106
103
103
100
100
97
97
High-dividend firms
Med.-dividend firms
Low-dividend firms
Zero-dividend firms
94
91
94
91
88
88
85
85
82
82
79
79
Dec.
2002
Jan.
2003
Apr.
May
June
July
2003
Cumulative Abnormal Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
106
106
Daily
Daily
105
105
104
104
103
103
102
102
101
101
100
100
99
High-dividend firms
Med.-dividend firms
Low-dividend firms
Zero-dividend firms
98
97
99
98
97
96
96
Dec.
2002
Jan.
2003
Apr.
May
June
2003
26
July
Figure 6
Zero-Dividend Breakout
Cumulative abnormal returns are based on the contemporaneous regression of portfolio returns on the three FamaFrench factors, estimated over the second halves of 2002 and 2003. The estimation interval for each event window
includes 6 months prior to its start and 6 months following its conclusion. The sample of zero-dividend stocks is
subdivided further into those of firms with different positive amounts of repurchases and those with no share
repurchase activity. The cumulative abnormal returns of firms repurchasing > 2% of market value are depicted by the
thick solid line, and those of firms repurchasing < 2% of market value with a thin solid line. The returns for each
subsample are normalized to 100 at the start of each event window.
Cumulative Abnormal Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
106
106
Daily
Daily
104
104
102
102
100
100
Major Repurchases
Minor Repurchases
No Repurchases
98
98
96
96
Dec.
2002
Jan.
2003
Apr.
May
June
2003
27
July
Figure 7
United Kingdom Stock Returns by Dividend Intensity
The top panel depicts cumulative realized returns for a sample of 731 U.K. stocks in select months during 2002 and
2003. The returns are computed using stock price data from Thomson Financial. The returns are normalized to 100 at
the start of each event window. High-dividend firms are those with 2002 dividends to end-of-year price ratio ("dividend
yield") greater than 4 percent, medium-dividend firms have dividend yields between 2 and 4 percent, and low-dividend
firms have dividend yields of less than 2 percent. These portfolios contain 90, 281 and 254 firms, respectively.
Cumulative abnormal returns, depicted in the bottom panel, are based on the contemporaneous regression of
portfolio returns on the single market factor (FTSE 100), estimated over the second halves of 2002 and 2003.
Cumulative Realized Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
125
125
Daily
Daily
120
120
115
115
110
110
105
105
100
100
95
High-dividend firms
Med.-dividend firms
Low-dividend firms
Zero-dividend firms
90
85
95
90
85
80
80
Dec.
2002
Jan.
2003
Apr.
May
June
July
2003
Cumulative Abnormal Returns
Index Level (Jan. 2 = 100)
Index Level (May 13 = 100)
108
108
Daily
Daily
106
106
104
104
102
102
100
100
98
98
96
96
Dec.
2002
Jan.
2003
Apr.
May
June
2003
28
July
Table 1. - Description of Portfolios
The table presents a summary of select financial characteristics for a sample of 2,842 U.S. stocks
subdivided on the basis of their dividend payout choices. High-dividend firms are those with 2002
dividends to end-of-year price ratio (“dividend yield”) greater than 3 percent, medium-dividend firms have
dividend yields between 1 and 3 percent, and low-dividend firms have dividend yields of less than 1
percent. All firm statistics are year-end 2002 except Cash Flow / Capx, which is the median ratio of 1999,
2000, and 2002. Cash includes short-term investments. The dataset is a merged sample from
Compustat and CRSP, filtered for public U.S. firms, excluding REITs and open-end funds.
th
Portfolio
Number
of Firms
Median
Assets
($
millions)
Median
Dividend
Yield
(percent)
Median
Capx /
Net PPE
(percent)
Median
Cash* /
Assets
(percent)
Median
LT Debt /
Assets
(percent)
Median
Csh
Flow /
Capx
(percent)
25
perc.
Csh
Flow /
Capx
(percent)
High-Dividend
256
1351
4.1
11.8
3.5
22.8
161.0
104.2
Med-Dividend
627
1559
1.8
13.7
4.8
14.4
212.2
145.1
Low-Dividend
444
1525
0.6
16.2
5.9
14.2
209.0
117.2
Zero-Dividend
1515
369
0.0
23.5
13.8
8.0
161.0
63.1
* Cash includes short-term investments.
All firm statistics from year-end 2002 except Cash Flow / Capx, which is the median ratio of 1999, 2000, and 2002.
Data is merged sample from Compustat and CRSP, filtered for public U.S. firms, excluding REITs and open-end funds.
29
Table 2. - Tests of Significance
The table presents statistical tests of differences in realized cumulative abnormal returns
(CAR) over the two event windows across various categorizations of U.S. stocks. Cumulative
abnormal returns are based on the contemporaneous regression of equity returns on the
three Fama-French factors, estimated over the second halves of 2002 and 2003. The top two
panels are CARs for portfolios of equities with different levels of dividend yields. Highdividend firms are those with dividend yields greater than 3 percent, medium-dividend firms
have dividend yields between 1 and 3 percent, and low-dividend firms have dividend yields of
less than 1 percent. The bottom panel restricts the sample to firms with publicly traded
bonds. In this sample, cumulative abnormal equity returns for high-dividend firms over the
May 2003 event window are compared with those for low-dividend firms. The same
comparison is made for cumulative abnormal bond returns, which are based on the
regression of bond returns on the change in yield in Treasury notes of comparable maturity
and change in spread for a corporate bond index of comparable rating. In all panels shaded
areas denote statistical significance at the 5 percent level or better.
A. Tests of Significance - January
Portfolio
C.A.R.
Jan 2 - 9
(percent)
S.E. Residuals
from Regression
High-Dividend
1.23
0.0024
0.0192
0.0183
Med-Dividend
-0.15
0.0021
0.3880
0.3418
Low-Dividend
-0.45
0.0022
0.2026
Zero-Dividend
0.30
0.0029
0.3375
P - diff than P - diff than
zero
low div.
0.2007
B. Tests of Significance - May
Portfolio
C.A.R.
May 13 - 28
(percent)
S.E. Residuals
from Regression
High-Dividend
2.70
0.0024
0.0004
0.0002
Med-Dividend
-0.52
0.0021
0.2268
0.2883
Low-Dividend
-1.09
0.0022
0.0691
Zero-Dividend
1.51
0.0029
0.0578
30
P - diff than P - diff than
zero
low div.
0.0158
Table 2. - Tests of Significance (continued)
C. Tests of Significance - May - Sample with Public Bonds Outstanding
C.A.R. May 13 - 28 (percent)
Return Type
High
Dividend Firms
Low
Dividend Firms
P - abnormal returns high
div. diff than low div.*
Equity
Returns
4.98
2.02
0.0060
Bond
Returns
-0.05
-0.22
0.4897
* From a regression of abnormal returns on a constant and a dummy variable for dividend portfolio type.
31
Table 3. - Equity Issuance Proportions for June 2003 to August 2005
The table summarizes equity issuance by dividend-paying firms and zero-dividend firms during the period
from June 2003 through August 2005. Zero-dividend firms are further subdivided into those with major
and minor share repurchases, and those that did not buy back shares over this period. We define issuers
as firms that issued shares numbering two percent or more of their shares outstanding at year-end 2002
over the period described above. The second row in the table shows the fraction of firms issuing
equities, and the third row quantifies the extent of issuance, defined as the number of newly issued
shares relative to shares outstanding at the end of 2002. Equity issuance data are obtained from SDC.
Firms with No Dividends
Repurchases Repurchases Repurchases
=0
< 2%
> 2%
Number of Firms
Firms with
Dividends
916
415
234
1380
Percent Issuing Equity
(June 2003 to August 2005)
14%
12%
7%*
12%
Newly Issued Shares as Percent of
2002 Shares (median among issuers)
21%
19%
22%
13%
*The fraction of major-repurchasing zero-dividend firms issuing equities is statistically different from that for minor repurchasing
zero-dividend firms at the 10 percent level, and different from that for non-repurchasing firms at the 1 percent level.
32
Table 4. – Weekly Excess Returns by Dividend Portfolio
The table summarizes cumulative abnormal returns in each week during the year-long period starting in November, 2002. The
CARs are computed on the basis of the three-factor Fama-French model for each of the following dividend-yield portfolios: those of
high-dividend firms (dividend yield greater than 3 percent), low-dividend firms (dividend yield less than 3 percent), and zerodividend firms. Weeks that are defined as tax-event windows in the paper are shaded. The statistical significance of the difference
between a given week's CAR and portfolio-specific sample mean is denoted by * and ** for 10 and 5 percent levels, respectively.
Rank
High Dividend
Date
Return
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
28-May-03
11-Dec-02
24-Dec-02
8-Jan-03
21-May-03
18-Dec-02
30-Jul-03
23-Jul-03
22-Jan-03
29-Oct-03
14-May-03
30-Apr-03
2-Jul-03
1-Oct-03
16-Jul-03
26-Mar-03
5-Feb-03
20-Nov-02
4-Dec-02
31-Dec-02
5-Mar-03
27-Nov-02
10-Sep-03
26-Feb-03
23-Apr-03
19-Feb-03
16-Apr-03
13-Nov-02
11-Jun-03
7-May-03
2-Apr-03
4-Jun-03
22-Oct-03
17-Sep-03
9-Apr-03
24-Sep-03
20-Aug-03
13-Aug-03
18-Jun-03
27-Aug-03
19-Mar-03
5-Nov-03
29-Jan-03
12-Feb-03
25-Jun-03
8-Oct-03
3-Sep-03
12-Mar-03
15-Jan-03
9-Jul-03
15-Oct-03
6-Aug-03
1.58 **
0.96 *
0.79
0.71
0.70
0.67
0.63
0.61
0.52
0.48
0.42
0.42
0.34
0.34
0.27
0.21
0.18
0.17
0.15
0.14
0.13
0.12
0.12
0.09
0.08
0.05
0.05
0.03
-0.01
-0.01
-0.04
-0.05
-0.07
-0.09
-0.10
-0.11
-0.13
-0.20
-0.28
-0.29
-0.30
-0.37
-0.39
-0.43
-0.43
-0.50
-0.50
-0.53
-0.55
-0.62
-0.67
-0.77 *
Low Dividend
Date
Return
4-Jun-03
1-Oct-03
29-Oct-03
18-Dec-02
4-Dec-02
5-Feb-03
13-Aug-03
24-Dec-02
19-Mar-03
7-May-03
16-Apr-03
11-Jun-03
6-Aug-03
23-Jul-03
30-Jul-03
11-Dec-02
16-Jul-03
24-Sep-03
23-Apr-03
25-Jun-03
13-Nov-02
26-Feb-03
2-Apr-03
5-Nov-03
9-Jul-03
14-May-03
31-Dec-02
22-Oct-03
26-Mar-03
9-Apr-03
2-Jul-03
30-Apr-03
15-Oct-03
22-Jan-03
8-Oct-03
29-Jan-03
20-Aug-03
15-Jan-03
17-Sep-03
18-Jun-03
20-Nov-02
12-Feb-03
3-Sep-03
28-May-03
8-Jan-03
19-Feb-03
12-Mar-03
5-Mar-03
10-Sep-03
21-May-03
27-Aug-03
27-Nov-02
33
0.85
0.85
0.85
0.82
0.80
0.74
0.72
0.71
0.71
0.69
0.66
0.59
0.53
0.50
0.48
0.44
0.43
0.41
0.39
0.31
0.30
0.27
0.25
0.23
0.23
0.22
0.20
0.19
0.18
0.17
0.17
0.14
0.09
0.07
0.07
0.05
0.05
0.03
-0.03
-0.04
-0.09
-0.11
-0.13
-0.17
-0.20
-0.33
-0.40
-0.40
-0.40
-0.42 *
-0.45 *
-0.51 *
Zero Dividend
Date
Return
27-Nov-02
20-Nov-02
23-Apr-03
28-May-03
9-Jul-03
14-May-03
31-Dec-02
26-Mar-03
30-Apr-03
19-Mar-03
18-Jun-03
13-Nov-02
18-Dec-02
2-Jul-03
7-May-03
22-Oct-03
29-Oct-03
11-Jun-03
4-Dec-02
6-Aug-03
24-Dec-02
21-May-03
4-Jun-03
27-Aug-03
25-Jun-03
23-Jul-03
11-Dec-02
8-Jan-03
22-Jan-03
20-Aug-03
16-Jul-03
3-Sep-03
10-Sep-03
13-Aug-03
24-Sep-03
26-Feb-03
5-Nov-03
8-Oct-03
15-Jan-03
16-Apr-03
19-Feb-03
9-Apr-03
30-Jul-03
15-Oct-03
2-Apr-03
12-Mar-03
17-Sep-03
29-Jan-03
1-Oct-03
5-Mar-03
12-Feb-03
5-Feb-03
1.31 **
1.02 **
0.94 *
0.76
0.73
0.71
0.69
0.67
0.64
0.63
0.54
0.44
0.44
0.42
0.41
0.39
0.38
0.38
0.37
0.35
0.34
0.28
0.27
0.26
0.25
0.23
0.21
0.20
0.15
0.14
0.12
0.11
0.08
0.06
0.05
-0.04
-0.04
-0.05
-0.07
-0.11
-0.13
-0.13
-0.13
-0.18
-0.21
-0.25
-0.29
-0.31
-0.52 *
-0.52 *
-0.59 *
-0.65 **
Working Paper Series
A series of research studies on regional economic issues relating to the Seventh Federal
Reserve District, and on financial and economic topics.
A Proposal for Efficiently Resolving Out-of-the-Money Swap Positions
at Large Insolvent Banks
George G. Kaufman
WP-03-01
Depositor Liquidity and Loss-Sharing in Bank Failure Resolutions
George G. Kaufman
WP-03-02
Subordinated Debt and Prompt Corrective Regulatory Action
Douglas D. Evanoff and Larry D. Wall
WP-03-03
When is Inter-Transaction Time Informative?
Craig Furfine
WP-03-04
Tenure Choice with Location Selection: The Case of Hispanic Neighborhoods
in Chicago
Maude Toussaint-Comeau and Sherrie L.W. Rhine
WP-03-05
Distinguishing Limited Commitment from Moral Hazard in Models of
Growth with Inequality*
Anna L. Paulson and Robert Townsend
WP-03-06
Resolving Large Complex Financial Organizations
Robert R. Bliss
WP-03-07
The Case of the Missing Productivity Growth:
Or, Does information technology explain why productivity accelerated in the United States
but not the United Kingdom?
Susanto Basu, John G. Fernald, Nicholas Oulton and Sylaja Srinivasan
WP-03-08
Inside-Outside Money Competition
Ramon Marimon, Juan Pablo Nicolini and Pedro Teles
WP-03-09
The Importance of Check-Cashing Businesses to the Unbanked: Racial/Ethnic Differences
William H. Greene, Sherrie L.W. Rhine and Maude Toussaint-Comeau
WP-03-10
A Firm’s First Year
Jaap H. Abbring and Jeffrey R. Campbell
WP-03-11
Market Size Matters
Jeffrey R. Campbell and Hugo A. Hopenhayn
WP-03-12
The Cost of Business Cycles under Endogenous Growth
Gadi Barlevy
WP-03-13
The Past, Present, and Probable Future for Community Banks
Robert DeYoung, William C. Hunter and Gregory F. Udell
WP-03-14
1
Working Paper Series (continued)
Measuring Productivity Growth in Asia: Do Market Imperfections Matter?
John Fernald and Brent Neiman
WP-03-15
Revised Estimates of Intergenerational Income Mobility in the United States
Bhashkar Mazumder
WP-03-16
Product Market Evidence on the Employment Effects of the Minimum Wage
Daniel Aaronson and Eric French
WP-03-17
Estimating Models of On-the-Job Search using Record Statistics
Gadi Barlevy
WP-03-18
Banking Market Conditions and Deposit Interest Rates
Richard J. Rosen
WP-03-19
Creating a National State Rainy Day Fund: A Modest Proposal to Improve Future
State Fiscal Performance
Richard Mattoon
WP-03-20
Managerial Incentive and Financial Contagion
Sujit Chakravorti and Subir Lall
WP-03-21
Women and the Phillips Curve: Do Women’s and Men’s Labor Market Outcomes
Differentially Affect Real Wage Growth and Inflation?
Katharine Anderson, Lisa Barrow and Kristin F. Butcher
WP-03-22
Evaluating the Calvo Model of Sticky Prices
Martin Eichenbaum and Jonas D.M. Fisher
WP-03-23
The Growing Importance of Family and Community: An Analysis of Changes in the
Sibling Correlation in Earnings
Bhashkar Mazumder and David I. Levine
WP-03-24
Should We Teach Old Dogs New Tricks? The Impact of Community College Retraining
on Older Displaced Workers
Louis Jacobson, Robert J. LaLonde and Daniel Sullivan
WP-03-25
Trade Deflection and Trade Depression
Chad P. Brown and Meredith A. Crowley
WP-03-26
China and Emerging Asia: Comrades or Competitors?
Alan G. Ahearne, John G. Fernald, Prakash Loungani and John W. Schindler
WP-03-27
International Business Cycles Under Fixed and Flexible Exchange Rate Regimes
Michael A. Kouparitsas
WP-03-28
Firing Costs and Business Cycle Fluctuations
Marcelo Veracierto
WP-03-29
Spatial Organization of Firms
Yukako Ono
WP-03-30
Government Equity and Money: John Law’s System in 1720 France
François R. Velde
WP-03-31
2
Working Paper Series (continued)
Deregulation and the Relationship Between Bank CEO
Compensation and Risk-Taking
Elijah Brewer III, William Curt Hunter and William E. Jackson III
WP-03-32
Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs
Christopher R. Knittel and Victor Stango
WP-03-33
Self-Employment as an Alternative to Unemployment
Ellen R. Rissman
WP-03-34
Where the Headquarters are – Evidence from Large Public Companies 1990-2000
Tyler Diacon and Thomas H. Klier
WP-03-35
Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve’s
New Discount Window
Craig Furfine
WP-04-01
Netting, Financial Contracts, and Banks: The Economic Implications
William J. Bergman, Robert R. Bliss, Christian A. Johnson and George G. Kaufman
WP-04-02
Real Effects of Bank Competition
Nicola Cetorelli
WP-04-03
Finance as a Barrier To Entry: Bank Competition and Industry Structure in
Local U.S. Markets?
Nicola Cetorelli and Philip E. Strahan
WP-04-04
The Dynamics of Work and Debt
Jeffrey R. Campbell and Zvi Hercowitz
WP-04-05
Fiscal Policy in the Aftermath of 9/11
Jonas Fisher and Martin Eichenbaum
WP-04-06
Merger Momentum and Investor Sentiment: The Stock Market Reaction
To Merger Announcements
Richard J. Rosen
WP-04-07
Earnings Inequality and the Business Cycle
Gadi Barlevy and Daniel Tsiddon
WP-04-08
Platform Competition in Two-Sided Markets: The Case of Payment Networks
Sujit Chakravorti and Roberto Roson
WP-04-09
Nominal Debt as a Burden on Monetary Policy
Javier Díaz-Giménez, Giorgia Giovannetti, Ramon Marimon, and Pedro Teles
WP-04-10
On the Timing of Innovation in Stochastic Schumpeterian Growth Models
Gadi Barlevy
WP-04-11
Policy Externalities: How US Antidumping Affects Japanese Exports to the EU
Chad P. Bown and Meredith A. Crowley
WP-04-12
Sibling Similarities, Differences and Economic Inequality
Bhashkar Mazumder
WP-04-13
3
Working Paper Series (continued)
Determinants of Business Cycle Comovement: A Robust Analysis
Marianne Baxter and Michael A. Kouparitsas
WP-04-14
The Occupational Assimilation of Hispanics in the U.S.: Evidence from Panel Data
Maude Toussaint-Comeau
WP-04-15
Reading, Writing, and Raisinets1: Are School Finances Contributing to Children’s Obesity?
Patricia M. Anderson and Kristin F. Butcher
WP-04-16
Learning by Observing: Information Spillovers in the Execution and Valuation
of Commercial Bank M&As
Gayle DeLong and Robert DeYoung
WP-04-17
Prospects for Immigrant-Native Wealth Assimilation:
Evidence from Financial Market Participation
Una Okonkwo Osili and Anna Paulson
WP-04-18
Individuals and Institutions: Evidence from International Migrants in the U.S.
Una Okonkwo Osili and Anna Paulson
WP-04-19
Are Technology Improvements Contractionary?
Susanto Basu, John Fernald and Miles Kimball
WP-04-20
The Minimum Wage, Restaurant Prices and Labor Market Structure
Daniel Aaronson, Eric French and James MacDonald
WP-04-21
Betcha can’t acquire just one: merger programs and compensation
Richard J. Rosen
WP-04-22
Not Working: Demographic Changes, Policy Changes,
and the Distribution of Weeks (Not) Worked
Lisa Barrow and Kristin F. Butcher
WP-04-23
The Role of Collateralized Household Debt in Macroeconomic Stabilization
Jeffrey R. Campbell and Zvi Hercowitz
WP-04-24
Advertising and Pricing at Multiple-Output Firms: Evidence from U.S. Thrift Institutions
Robert DeYoung and Evren Örs
WP-04-25
Monetary Policy with State Contingent Interest Rates
Bernardino Adão, Isabel Correia and Pedro Teles
WP-04-26
Comparing location decisions of domestic and foreign auto supplier plants
Thomas Klier, Paul Ma and Daniel P. McMillen
WP-04-27
China’s export growth and US trade policy
Chad P. Bown and Meredith A. Crowley
WP-04-28
Where do manufacturing firms locate their Headquarters?
J. Vernon Henderson and Yukako Ono
WP-04-29
Monetary Policy with Single Instrument Feedback Rules
Bernardino Adão, Isabel Correia and Pedro Teles
WP-04-30
4
Working Paper Series (continued)
Firm-Specific Capital, Nominal Rigidities and the Business Cycle
David Altig, Lawrence J. Christiano, Martin Eichenbaum and Jesper Linde
WP-05-01
Do Returns to Schooling Differ by Race and Ethnicity?
Lisa Barrow and Cecilia Elena Rouse
WP-05-02
Derivatives and Systemic Risk: Netting, Collateral, and Closeout
Robert R. Bliss and George G. Kaufman
WP-05-03
Risk Overhang and Loan Portfolio Decisions
Robert DeYoung, Anne Gron and Andrew Winton
WP-05-04
Characterizations in a random record model with a non-identically distributed initial record
Gadi Barlevy and H. N. Nagaraja
WP-05-05
Price discovery in a market under stress: the U.S. Treasury market in fall 1998
Craig H. Furfine and Eli M. Remolona
WP-05-06
Politics and Efficiency of Separating Capital and Ordinary Government Budgets
Marco Bassetto with Thomas J. Sargent
WP-05-07
Rigid Prices: Evidence from U.S. Scanner Data
Jeffrey R. Campbell and Benjamin Eden
WP-05-08
Entrepreneurship, Frictions, and Wealth
Marco Cagetti and Mariacristina De Nardi
WP-05-09
Wealth inequality: data and models
Marco Cagetti and Mariacristina De Nardi
WP-05-10
What Determines Bilateral Trade Flows?
Marianne Baxter and Michael A. Kouparitsas
WP-05-11
Intergenerational Economic Mobility in the U.S., 1940 to 2000
Daniel Aaronson and Bhashkar Mazumder
WP-05-12
Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles
Mariacristina De Nardi, Eric French, and John Bailey Jones
WP-05-13
Fixed Term Employment Contracts in an Equilibrium Search Model
Fernando Alvarez and Marcelo Veracierto
WP-05-14
Causality, Causality, Causality: The View of Education Inputs and Outputs from Economics
Lisa Barrow and Cecilia Elena Rouse
WP-05-15
5
Working Paper Series (continued)
Competition in Large Markets
Jeffrey R. Campbell
WP-05-16
Why Do Firms Go Public? Evidence from the Banking Industry
Richard J. Rosen, Scott B. Smart and Chad J. Zutter
WP-05-17
Clustering of Auto Supplier Plants in the U.S.: GMM Spatial Logit for Large Samples
Thomas Klier and Daniel P. McMillen
WP-05-18
Why are Immigrants’ Incarceration Rates So Low?
Evidence on Selective Immigration, Deterrence, and Deportation
Kristin F. Butcher and Anne Morrison Piehl
WP-05-19
Constructing the Chicago Fed Income Based Economic Index – Consumer Price Index:
Inflation Experiences by Demographic Group: 1983-2005
Leslie McGranahan and Anna Paulson
WP-05-20
Universal Access, Cost Recovery, and Payment Services
Sujit Chakravorti, Jeffery W. Gunther, and Robert R. Moore
WP-05-21
Supplier Switching and Outsourcing
Yukako Ono and Victor Stango
WP-05-22
Do Enclaves Matter in Immigrants’ Self-Employment Decision?
Maude Toussaint-Comeau
WP-05-23
The Changing Pattern of Wage Growth for Low Skilled Workers
Eric French, Bhashkar Mazumder and Christopher Taber
WP-05-24
U.S. Corporate and Bank Insolvency Regimes: An Economic Comparison and Evaluation
Robert R. Bliss and George G. Kaufman
WP-06-01
Redistribution, Taxes, and the Median Voter
Marco Bassetto and Jess Benhabib
WP-06-02
Identification of Search Models with Initial Condition Problems
Gadi Barlevy and H. N. Nagaraja
WP-06-03
Tax Riots
Marco Bassetto and Christopher Phelan
WP-06-04
The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings
Gene Amromin, Jennifer Huang,and Clemens Sialm
WP-06-05
Why are safeguards needed in a trade agreement?
Meredith A. Crowley
WP-06-06
6
Working Paper Series (continued)
Taxation, Entrepreneurship, and Wealth
Marco Cagetti and Mariacristina De Nardi
WP-06-07
A New Social Compact: How University Engagement Can Fuel Innovation
Laura Melle, Larry Isaak, and Richard Mattoon
WP-06-08
Mergers and Risk
Craig H. Furfine and Richard J. Rosen
WP-06-09
Two Flaws in Business Cycle Accounting
Lawrence J. Christiano and Joshua M. Davis
WP-06-10
Do Consumers Choose the Right Credit Contracts?
Sumit Agarwal, Souphala Chomsisengphet, Chunlin Liu, and Nicholas S. Souleles
WP-06-11
Chronicles of a Deflation Unforetold
François R. Velde
WP-06-12
Female Offenders Use of Social Welfare Programs Before and After Jail and Prison:
Does Prison Cause Welfare Dependency?
Kristen F. Butcher and Robert J. LaLonde
Eat or Be Eaten: A Theory of Mergers and Firm Size
Gary Gorton, Matthias Kahl, and Richard Rosen
Do Bonds Span Volatility Risk in the U.S. Treasury Market?
A Specification Test for Affine Term Structure Models
Torben G. Andersen and Luca Benzoni
WP-06-13
WP-06-14
WP-06-15
Transforming Payment Choices by Doubling Fees on the Illinois Tollway
Gene Amromin, Carrie Jankowski, and Richard D. Porter
WP-06-16
How Did the 2003 Dividend Tax Cut Affect Stock Prices?
Gene Amromin, Paul Harrison, and Steven Sharpe
WP-06-17
7
@FedFRASER